The fuel duty dilemma to hit drivers and reshape UK tax policy

For over a decade, successive UK governments have sidestepped the thorny issue of raising fuel duty. Despite regular expectations from the Office for Budget Responsibility that rates would increase in line with inflation, chancellors have opted for a freeze—leaving a growing hole in the nation’s finances with every passing year. When Chancellor Rachel Reeves opted last autumn to keep duty steady at 52.95p per litre, the result was a £3bn loss in public revenue, a move met with confusion among many economists given the simplicity of the increase.

While motorists breathed a sigh of relief at the freeze, the debate has resumed with fresh urgency ahead of this month’s Budget. There is a sense of inevitability: as the shift towards electric vehicles accelerates, the receipts from fuel duty will continue to dwindle. In fact, the Institute for Fiscal Studies (IFS) estimates that revenue from the tax this year is £17.4bn lower than if the rate had followed inflation since 2011. The current tax represents around 2.5 percent of all UK receipts, or approximately £850 per household, with VAT on fuel adding another £5bn annually.

Pressure has been heaped onto Reeves not only by the dwindling contribution to public finances, but also by industry voices such as Richard Smith of the Road Haulage Association. Smith notes that diesel costs more in Britain than anywhere else in Europe and that government claims over half of each pound spent at the pump. Any rise—whether modest or significant—would be viewed as a direct strike against working people and a critical industry already feeling the squeeze from narrow margins.

Opposition parties have seized the opportunity to position themselves as champions of drivers, but the reality remains stark: the government must either raise fuel duties or face an ever-widening fiscal gap, estimated at a potential £30bn as the petrol and diesel car market recedes by 2030. Calls for a more gradual approach have emerged, with the Resolution Foundation suggesting that duty could rise in small quarterly increments rather than a single shock, a tactic designed to avoid painful jumps at the pumps.

Should the Chancellor reverse the 5p cut brought in during the energy price surge post-Ukraine invasion, and align rates with inflation now that oil prices have softened, the government could capitalise on gentler market conditions to rebuild Treasury coffers. Yet, as the IFS cautions, increases more severe than inflationary adjustments may be needed to plug the revenue gap, with figures indicating that a move to 65.65p per litre might be required to restore balance by the end of the decade.

A failure to resolve the issue may pave the way for much broader reforms. Some are advocating for the arrival of road pricing, taxing motorists by distance travelled or pollution produced. While ministers have dismissed its introduction in the immediate future, the pressure to secure the tax base as drivers shift to electric vehicles—and thus escape current fuel duty—remains ever-present. The coming budget may determine whether motorists face a slow return to tax increases, or whether the government is preparing for a more fundamental shift in how Britain pays for its roads.